Is there a better way to understand market trends and inter-related events in an effort to be a more keen exchange traded fund (ETF) investor?

Trang Ho for Investor’s Business Daily talked to Chartered Market Technician Brandon Wendell to get a better understanding of how studying a few ETFs can lead to a better understanding of the market’s messages.

This is how Wendell uses ETF for market analysis:

  • First, he uses copper as a leading indicator, since it’s found everywhere in our society and can be a bellwether of current or future building activity. High copper demand can signal expansion. iPath Dow Jones-UBS Copper Subindex Total Return (JJC) can signal turning points in the stock market or at least correlate with moves in the stock market and give extra confirmation that the market is going to continue in one direction or the other. JJC is up 60% year-to-date.
  • PowerShares US Dollar Index Bullish (UUP) is a good indicator of the health of the U.S. dollar. The U.S. dollar has been declining quite a bit recently; that’s allowed U.S. equity prices to rise. UUP is down 2.5% year-to-date.
  • iShares Barclays 7-10 Year Treasury (IEF) is coming into an area of consolidation (or support) that it hit last year in October and November. This indicates interest rate are going up and as rates go up, the economy will slow as money becomes tighter.
  • United States Oil (USO) and gold, Market Vectors Gold Miners (GDX) are good indicators if the market is pushing on the downside. Wendell notes that there’s about a 75% correlation between USOand the stock market, while gold itself tends to follow after GDX.

Other areas that can signal changes in the economy include ETFs such as Market Vectors Steel (SLX), iShares Silver Trust (SLV) – both metals are using heavily in building and construction – and Consumer Discretionary Select Sector SPDR (XLY). Consumer spending is two-thirds of the economy, and as consumers spend more on discretionary items, it could signal improving confidence and lead the way higher.

Whenever you invest, be ready with a strategy such as the 200 day-moving-average and this will help keep your emotions out of the equation. This will also help keep your guesswork to a minimum.

For more stories on strategy, visit our strategy category.

For more stories on commodities, visit our commodities category.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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